Deep value, contrarian, and Grahamite investment

Irony

Mario Gabelli has long been criticized for his outsized remuneration at Gamco Investors Inc (NYSE:GBL). In 2005, a large investor in Gabelli Group Capital Partners, or G.G.C.P., Gabelli’s private company, sued him for, among other things, “looting the assets of the company.” According to this New York Times article, document disclosure in the case revealed that Gabelli “pays himself 20 percent of G.G.C.P.’s pretax revenue as a “management fee.” As recently as yesterday, the Wall Street Journal noted in its “Heard on the Street” column (subscription required):

… Mr. Gabelli’s compensation package has been a severe drag on earnings. In 2008, Gamco’s assets fell by a third and net income totaled $25 million. Even so, Mr. Gabelli received $46 million in cash compensation, 13 times as much as the second-highest-paid executive.

Gamco took an activist position in Biglari Holdings Inc (NYSE:BH) back when it was the humble Steak n Shake Company. Gamco’s most recent amendment to its 13D filing is an interesting change in direction. From Item 4 Purpose:

GAMCO has announced that, to the extent it has voting authority over its investment advisory accounts, GAMCO intends to vote AGAINST approval of the Incentive Bonus Agreement between the Issuer and Sardar Biglari, dated April 30, 2010 (the “Agreement”) at a special meeting of shareholders of the Issuer at which the Agreement will be submitted for approval by the shareholders of the Issuer. Consistent with applicable laws and regulations, GAMCO may discuss its plans to so vote with a limited number of institutional shareholders and others.

Company shall pay to Executive, determined as of the last day of each fiscal year of Company (including any fiscal year in which any of the events set forth in Section 4(a) occur) (“Incentive Compensation Calculation Date”), incentive compensation equal to the Incentive Compensation Amount (as defined below) as of such Incentive Compensation Calculation Date; provided, however, that no duplicate Incentive Compensation Amount shall be paid to Executive in any fiscal year. The Incentive Compensation Amount shall be paid to Executive as promptly as practicable after each Incentive Compensation Calculation Date, and in no event later than 75 days thereafter (the “Payment Date”), subject to Section 6(c). The “Incentive Compensation Amount” means the amount computed (subject to proration with respect to any fiscal year during the term of this Agreement in which any of the events set forth in Section 4(a) occurs, determined based on the date of such event) using the following formula where “x” equals 1.05 (subject to proration for the 2010 fiscal year and any short fiscal year during the term of this Agreement) and “n” equals the number of years between the most recent Incentive Compensation Calculation Date and the Incentive Compensation Calculation Date on which the High Water Mark was achieved:

(0.25)(New Book Value – ((High Water Mark)(x)n))

In summary, Biglari gets 25% of the annual gain in book value over 5%. Gabelli gets 20% of pretax revenue. Mario thinks Sardar is going to be paid too much. Isn’t this a case of the pot calling the kettle greedy? Or is this just gamesmanship on Gabelli’s part?

Mario may be greedy and overpaid but did he change the comp agreement midstream like Sardar did? Anyone who buys GAAMCO knows how much Mario is going to pay himself. Investors in Biglari Holdings were blindsided. Plus Mario owns a huge stake in Gaamco unlike Sardar.